IBM's analyst meeting fails to inspire

Bear Stearns downgrades, others remain cautious

SusanLerner

NEW YORK (CBS.MW) -- Analysts have smiled upon many tech stocks over the last month or so, leaving many eagerly awaiting the verdict from IBM's much-anticipated meeting with analysts on Thursday.

Unfortunately, the news apparently wasn't what investors wanted to hear.

Shares of Big Blue
IBM, +0.47%
fell $3.39, or 2.9 percent, to trade at $111.81 on Friday, as the sell-side community weighed in with mostly cautious comments.

Most prominent was a downgrade from Bear Stearns analyst Andrew Neff, who cut his rating on the stock to "attractive" from "buy," citing valuation concerns and issues that could complicate IBM's second-half comparisons.

According to Neff, Chairman Lou Gerstner emphasized that IBM's strategic opportunities are in services, software and OEM technology businesses and that the PC business is clearly not a strategic part of IBM's road map.

He did not, however, give any sense of an action plan for the PC business, Neff said.

Neff maintained estimates for earnings of $4.60 per share on revenues of $92 billion for 2001 and $5.30 per share on revenues of $99 billion for 2002, noting that the company provided no new guidance at the meeting.

"While its diversified business model provides consistent earnings and cash-flow growth and relatively high degree of earnings predictability, the business comparisons start getting tougher for IBM in the later part of 2001, particularly in Q4," said Neff.

From a valuation perspective, Neff noted that IBM's shares -- stuck in a trading range of $90 to $135 for nearly two years now -- have generally peaked at a 20 percent premium and have often stalled in the face of difficult comparisons.

"For the past year, IBM has benefited from a scenario under which the operations that accounted for 90 percent of revenues (services, mainframe, PCs, servers, technology) were at positive inflection points," Neff said.

"However, as the company enters the third quarter, that figure drops to around 40-50 percent and then to 20-30 percent in the fourth quarter."

Perhaps even more disappointing to investors than Neff's downgrade were the analysts who saw nothing at the meeting to prompt them to upgrade their recommendations on the stock.

"While the meeting was upbeat and IBM has improved its execution, we continue to believe that the shares have already discounted this success and more," Merrill Lynch analyst Tom Kraemer wrote in a research note. "We also believe that the relative outperformance of IBM shares may be increasingly difficult to maintain."

Kraemer rates IBM an "intermediate-term neutral, long-term buy."

Over at Prudential, analyst Kimberly Alexy left her "hold" rating on the stock unchanged, telling clients she does not find the risk/reward ratio compelling.

"We continue to believe that IBM faces the same challenges now as before: a much softer demand environment and international markets that may and in some cases already have started to weaken," said Alexy. "Despite IBM's protestations, there has been a material slowdown in IT spending in the U.S."

As a result of the challenging environment and risk to international markets, Alexy believes full year growth estimates for the company are still too high and will need to come down.

Even those analysts positive on IBM expressed disappointment with the meeting.

"In some ways the meeting was disappointing because there was nothing new. No confirmation of timing for the CEO change was provided," UBS Warburg analyst Don Young told clients. "Little was said about current demand trends in the formal presentations and in private discussions after the meeting most executives appeared to maintain the outlook."

Young said he's maintaining his "strong buy" rating on the stock for both the defensive nature of the financial model in a tough setting as well as for IBM's potential to gain share in enterprise computing.

Goldman Sachs analyst Laura Conigliaro, however, was exceedingly bullish in her note to clients following the meeting.

"Increasingly, IBM is becoming the go-to company in critical areas including services, microelectronics and middleware, while a much improved product portfolio in Unix servers and storage systems has elevated its competitiveness against the respective market leaders in those segments," she said.

IBM is on Goldman's "Recommended List," a position it has held since Conigliaro upgraded the company on April 19.

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